Does ESG performance affect audit pricing? Evidence from China

In this paper, we find that better environmental, social, and governmental (ESG) performance is associated with lower audit pricing in terms of both raw and abnormal audit fees in China. But the environmental, social, and governmental pillars don't play the same role in driving that relationship. Our main findings are robust to a battery of sensitivity tests, including alternative measures of ESG performance and additional control variables, as well as different approaches to address potential endogeneity. Additional analyses indicate that reduced risk and increased information transparency might be channels by which ESG performance affects audit pricing while auditor industry expertise and independence moderate this impact. Overall, this paper reveals the importance of considering the dimensional ESG factors simultaneously instead of on a stand-alone basis to better understand ESG and promote balanced ESG development.